Working Paper: NBER ID: w27859
Authors: Ravi Jagannathan; Yang Zhang
Abstract: We show that superior performance relative to peers during stressful times identifies higher quality firms as measured by conventional historical financial statement based measures as well as default probability measures. Quality measured this way is persistent, but different from price momentum. Further, a managed portfolio that takes a long position in top quintile (Stable) firms and a short position in bottom quintile (Vulnerable) firms earns superior risk adjusted returns in excess of the risk-free rate. The portfolio has an annualized Fama and French three-factor alpha of 5.2% (t=5.04) and a five-factor alpha of 3.3% (t=3.38)
Keywords: No keywords provided
JEL Codes: G00; G10; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stressful time stable (SS) (C41) | higher quality characteristics (L15) |
| stressful time vulnerable (SV) (C41) | lower quality characteristics (L15) |
| stressful time stable (SS) (C41) | higher profitability (L21) |
| stressful time stable (SS) (C41) | lower asset growth rates (G19) |
| stressful time stable (SS) (C41) | lower average default probabilities (G33) |
| stressful time stable (SS) (C41) | higher quality scores (Piotroski F-score) (G32) |
| stressful time stable (SS) (C41) | significant outperformance in subsequent worst months (G41) |
| performance spread between SS and SV firms (G24) | stable over time (C62) |